Spanish debt auction, German confidence ease market fears

LONDON — Spanish borrowing costs jumped at a debt auction on Tuesday, but the sale went smoothly and German data gave an upbeat reading of the eurozone’s largest economy, providing some relief to investors worried about the debt crisis.

The euro and European shares rose and Spanish 10-year bond yields fell further below 6%, a key level breached on Monday.

Investors fear Spain’s economic problems will reignite Europe’s troubles; a break in a country’s debt yields above 6% has in the past accelerated the rise in borrowing costs to unsustainable territory.

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But Spain sold 3.2 billion euros of 12- and 18-month Treasury bills, slightly above its target, although yields were higher than at the last sale and analysts said the success was largely due to the participation of domestic banks.

Spain faces another test of investor sentiment on Thursday with a more challenging sale of two-year and 10-year bonds.

“The key was again domestic bank bidding…But it doesn’t change the bigger picture too much. The key will be the bond auction on Thursday,” said Michael Leister, rate strategist at DZ Bank.

Concerns over Spain hit risk appetite across all major markets earlier, with shares around the world weaker, oil prices slipping and gold edging below a key level of US$1,650 an ounce.

The surprise rise in the closely-watched German ZEW business sentiment boosted hopes that economy is recovering, strengthening European shares and the euro. U.S. stocks were poised to follow Europe higher, with futures for the S&P 500 and Dow Jones up 0.6 and 0.4% respectively.

The FTSE Eurofirst index of top European shares was last 1.2% higher at 1,044.52, with the MSCI world equity index up 0.4%.

The euro was up 0.1% at US$1.3150, clawing off a two-month low of US$1.2995 hit on Monday, while the dollar was 0.1% lower against a basket of major currencies at 79.45.

The single currency and share markets could get a further boost if U.S. housing data and industrial output for March, due at 1230 GMT and 1315 GMT, come in stronger than forecast.

Longer-term though, analysts cautioned that the strong German sentiment was not reflected in hard economic data while the Spanish debt demand came at the price of much higher premiums than in previous tenders.

“The over-arching theme in equity markets is still the re-ignition of the tensions in financial markets on euro zone concerns, and this is something that may stay with us for some time,” Gerhard Schwarz, head of equity strategy at Baader Bank, said.

ECB INTERVENTION EYED

German government bonds, viewed as the eurozone’s safest debt, fell after the data and Spanish auction cooled demand for less risky assets.

Ten-year Bund yields were up five basis points at 1.68% after falling as low as 1.622% on Monday.

Italian 10-year yields, which had followed Spanish bonds higher, were down six basis points at 5.53% .

If Spanish yields resume their rise and pull other peripheral sovereign debt yields up, the European Central Bank will face growing pressure to resume its bond purchases after last doing so on Feb. 29.

Spanish banks are easily the biggest borrowers from the ECB.

As pressure mounts for more support from authorities to calm market nervousness, a meeting of the International Monetary Fund later in the week will be a key focus for the markets. A plan to raise new resources for the global lender to contain the eurozone debt crisis tops the agenda.

Gold prices rose 0.3% to US$1,651.60 an ounce, pausing after a two-day sell-off as the euro firmed against the dollar and stock markets advanced after the Spanish auction.

A dramatic deterioration of the situation in the euro zone cold support gold in the longer term as a safe harbour from risk, analysts say.

Brent crude oil prices slipped, however, as worries about the euro zone’s debt problems refused to go away. Brent crude for June delivery was last down 0.1% at US$118.52 a barrel.